Oil Giant Tries to Shirk Royalty Payments to Indians

by Michelle Chen

Oct. 11, 2006 –
A case pending before the US Supreme Court may determine whether the oil industry can cast off millions in debts incurred while exploiting natural resources on Indian lands in the Southwestâ€™s San Juan Basin.

Tribes, along with federal and state authorities, are seeking to hold oil giant BP America liable for unpaid royalties from energy development. While BP seeks protection from its payment obligations under a statute of limitations on royalty claims, the Jicarilla Apache Nation, which relies heavily on revenues from oil and gas extraction on its lands, has rallied against what it views as an end-run around the industryâ€™s payment obligations.

From 1989 to 1996, BP America Production, then known as Amoco, sucked coal-bed methane gas from the San Juan Basin, which spans New Mexico and Colorado. Under land leases negotiated with the US government, the company was obligated to pay royalties to the Interior Department, at a standard rate of 12.5 percent, to be distributed to governments and tribes.

But a New Mexico state audit showed that BPâ€™s calculation method significantly under-estimated the market value of the gas. The audit determined that BP's payments had fallen $4 million short, and subsidiary Atlantic Richfield owed more than $780,000.

BP has refused to comply with a 1997 demand from the Interior Department to pay up. In oral arguments before the high court last week, the company contended that a federal statute of limitations removed its obligation to pay royalties owed from the earlier part of the lease, from 1989 to 1991. Under federal law, government claims against delinquent companies are constrained to a six-year time-frame.

A ruling in BPâ€™s favor, the tribe said, would grant companies an end-run around the federal land-lease system.

The case was appealed to the Supreme Court after a lower court ruled in the governmentâ€™s favor. The Interior Department, state governments and the Jicarilla Apache Nation argue that the statute of limitations does not apply in this case, because, in their interpretation, the statute covers only court claims, not administrative orders.

BP counters that exempting administrative orders from the time limit would lead to "fundamental unfairness" by potentially damaging the availability of evidence in a case, or increasing the cost of maintaining financial records.

But from the tribeâ€™s perspective, the real unfairness is in the potential loss of millions in overdue royalties. Under a ruling in BPâ€™s favor, the tribe said, companies could escape claims for past royalties outside the six-year limit â€“ and subsequently "be rewarded for underreporting the amount of royalties they owed to the tribe."

Under the leasing system, companies are supposed to pay royalties based on the value of the resources they extract, providing billions of dollars each year to tribal, federal and state governments.

Royalty disbursements and related revenues to Indian tribes alone amounted to some $420 million in fiscal year 2005, according to government data.

The Jicarilla Apache say the statute of limitations threatens to further corrupt an already broken regulatory system.

In addition to criticizing the industry, the Jicarilla Apache say the statute of limitations threatens to further corrupt an already broken regulatory system. Bureaucratic delays that may run up against the time-limit, the tribe says, are in part due to the governmentâ€™s own poor oversight, which in turn encourages more corporate malfeasance.

The tribe also asserts that corporations benefit from a double standard, since they have the leeway to deduct from their royalty debts amounts claimed as "overpayments" of past royalties. But these corporate claims are not subject to the statute of limitations.

The Jicarilla Apache report that energy royalties provide about half of their governmentâ€™s operating revenue.

A broad interpretation of the statute of limitations, the tribe warned in its brief, would "let oil and gas production companies off the hook" and force tribes to resort to suing the federal government instead to collect past royalty damages.

Royalty claims brought after 1996 are governed by a separate statute of limitations that explicitly covers both court claims as well as administrative rulings. But since that statute specifically exempts Indian lands, the pending case may especially impact tribes.

Yet tribes are not the only ones pushing for more accountability for both industry and the regulatory system. The Washington, DC-based watchdog group Project on Government Oversight (POGO) accuses the Minerals Management Service of shirking its regulatory duties by reducing staff and shifting toward computerized audits rather than in-depth investigations.

In congressional testimony last month, the group cited agency whistleblowersâ€™ reports of experiencing retaliation for exposing problems. POGO urged the Interior Department to ensure that "those responsible for the failures to do their job and collect what is owed the American taxpayer are held accountable."

Jill Grant, an attorney for the Jicarilla Apache Nation, said that the Interior Departmentâ€™s track record suggests that the royalty system is designed to promote the exploitation of Indian lands, not to compensate for it. "The movement of the governmentâ€™s policies is just to make the companies less and less accountable, rather than more," she said.